1. Field of the Invention
This invention relates generally to the field of data processing systems for the management of compensation plans used by merchants who use Network Marketing or Multi-Level Marketing (MLM) as a marketing approach. In this document, Network Marketing or MLM is defined as xe2x80x9can approach that remunerates participants for the purchases made by the people that they directly and indirectly introduced to particular products and/or services.xe2x80x9d Note that, in order to take into account the latest trends brought by the intensive use of computer technology, this definition of MLM covers both models where participants physically distribute products and where they do not (no matter the names or legal status that participants are given).
2. Description of Prior Art
Thirty years of marketing literature (product diffusion theory in particular) has abundantly documented the natural existence and the strategic importance of the consumers"" word-of-mouth. Word-of-mouth is the most effective form of commercial communication because it is timely, culturally adapted and interactive. Every day, it presides over a great number of marketing successes and failures. In fact, positive word-of-mouth is actually what mass marketers are seeking to generate when they define specific product positioning that they communicate through mass communications, mass distribution and packaging.
As a marketing approach, MLM aims at the same goal as mass marketing: create and keep a customer base for a specific offer. To do this, mass marketing companies try to create the social conditions for people to want to communicate their offer for free while MLM companies offer the people the possibility to be remunerated to communicate and distribute the offer to other people who will, in turn, do the same.
In order to be translated into a commercial success, word-of-mouth (natural or remunerated) requires the participation of a growing number of individuals. As opposed to what is expected of a traditional salesperson, one expects that an MLM participant does more than introduce the offer to end-consumers. In fact, one expects that a participant find other participants who, in addition to buying the offer, diffuse both the offer and the opportunity to other people around them. The very fact that more and more people accept to diffuse the offer and the opportunity ensures that, in the end, the offer reaches a large portion of the potential customers. In addition to necessitate a growing number of participants, MLM must deal with one normal economic constraint: the price at which a particular offer can be competitively sold sets a maximum margin that a company can give to those who contributed directly or indirectly to the end-sale. Combining this economic constraint with the nature of word-of-mouth, one realises the challenge that MLM must address in order to be effective: xe2x80x9cit must divide up a fixed margin among a growing number of participants while motivating them to introduce more people to the offer over timexe2x80x9d.
In order to remunerate people, MLM companies must trace the diffusion of the opportunity (which participant has introduced which participants) and the purchases of every participants. Such data is collected, stored and exploited thanks to computerized data processing systems. The precise exploitation of the data is defined by the compensation plan that determines exactly how the word-of-mouth is remunerated. To date, a plethora of MLM compensation plans have been developed. In the following paragraphs, we will introduce the idea that they come from two families of plans and we will explain why they fail to address the above MLM challenge.
A first family of plans can be seen as xe2x80x9cNon-Differentialxe2x80x9d. This family of plans includes compensation plans commonly known as Unilevels, Matrix and Binaries (30% of MLM compensation plans in existence today). All Non-Differential plans remunerate participants by offering predetermined margins on the business volume of a predetermined number of levels of downline (i.e. a number of generations directly and indirectly introduced to the offer by a particular participant). In Example 1 below, we illustrate the principle common to Non-Differential compensation plans.
Illustration of the Principle of Non-Differential Compensation Plans
In Example 1, the total margin to be redistributed is 20% (5%+5%+5%+5%) and the number of levels on which it is applied is 4. Note that the margin to be applied can vary from one level to the other (e.g. 2%+1%+7%+10%) and that the number of levels can theoretically be as high as infinity.
According to Example 1, if a participant has 4 participants on his level 1, 6 on his level 2, 8 on his level 3 and 11 on his level 4, and if each participant purchase $10 during a particular period, the compensation for that period is calculated as follows: (4xc3x97$10xc3x975%)+(6xc3x97$10xc3x975%)+(8xc3x97$10xc3x975%)+(11xc3x97$10xc3x975%)=14.50.
For a given number of downline participants who purchase a given quantity of product/services, Non-Differential systems pay out as much money to a participant who personally introduced only one person (small individual effort) as it does to a participant who personally introduced tens of people (big individual efforts). As illustrated below, let""s assume that our participant in Example 1 had the same number of participants in 4 downline levels (same business volume) but that his individual effort is four times less. For example, let""s assume he personally sponsored 1 participant, who sponsored 9 participants who collectively sponsored 8 participants who sponsored 11 participants.
Under this scenario where he does not perform individually, the compensation of our participant for that period is ($10xc3x975%)+(9xc3x97$10xc3x975%)+(8xc3x9710xc3x975%)+(11xc3x97$10xc3x975%)=$14.50 which is exactly the same as when he personally introduced 4 people.
Two Possible Sponsoring Scenarios According to Example 1
Obviously, such plans do not effectively address MLM""s challenge to divide Lup this 20% fixed margin among a growing number of participants while motivating them to introduce more people. As rational economic agents, people tend to optimize their ratio xe2x80x9cPotential Gains/Effortxe2x80x9d. Since the xe2x80x9cEffortxe2x80x9d rows faster than the xe2x80x9cPotential Gainxe2x80x9d when one introduces people who are not in one""s intimate social circle, the natural tendency""is to introduce the offer to a few and hope that they themselves build a large group of participants. All other things being, equal, the money given to participants who do not make significant individual efforts is not available to be given to those who make significant individual efforts. Doing so, Non-Differential plans fail to effectively motivate participants to make more efforts.
Approximately 70% of MLM compensation plans in existence today belong to a second family of plan that can be considered as Semi-Differential. Those plans are commonly known as Stair-Step/Break Aways (xe2x80x9cSSBAsxe2x80x9d). They are considered Semi-Differential because they use a two-pronged method to calculate the compensation of participants. First, they use a xe2x80x9cStair-Stepxe2x80x9d Differential method and then they switch to a Non-Differential method (similar to the one described above) commonly called xe2x80x9cBreak Awayxe2x80x9d.
The Stair-Step Differential component of SSBAs consists of providing participants with a discount table that associates a limited number of discount levels (margin) to different brackets of business volume purchased by a participant""s entire downline or group (no limit in the number of levels at this stage). A participant""s net discount (margin) is the result of a subtraction between that participant""s discount and the discounts applicable to those that s/he personally introduced (first downlines). In Example 2 below, we illustrate the kind of discount table common to Stair-Step Differential components in SSBA plans.
Illustration of a Discount Table for Stair-Step Differential Component in SSBA Plans
Note that the number of brackets, the level of group business volumes (limits of each bracket) and the applicable margins vary according to the operator""s constraints and resources. Generally, Stair-Step Differential tables consists of less than ten brackets and gives maximum margins of between 15% and 50% of business volume.
Using the table in Example 2, we can illustrate how the Stair-Step Differential component of the SSBA calculation works. If a participant has a group business volume of $300 and if (s)he has 2 first level downline participants with group business volumes of $100 each, his/her compensation is ($300xc3x975%)xe2x88x92(S100xc3x973%)xe2x88x92($100xc3x973%)=$9.
As clearly illustrated by the table in Example 2, the relationship between the margin (discount) and the group business volume can be seen as a Stair-Step mathematical function where the same margin is given to everyone within a certain volume bracket. In Example 2, 10% margin is given to every participant with a group business volume within $800 and $1,799.
As Non-Differential plans, Stair-Step Differentials present serious problems of effectiveness in remunerating for the effect of one""s word-of-mouth. In the case where participant A has personally introduced participant B (first downline), a Stair Step discount Table makes it possible for B to increase his/her group business volume so as to reach the same discount bracket as A. In such case, A""s net remuneration decreases even if B introduced more participants who bought more products. In Example 2, if our participant""s group business volume grows from $300 to $500 because one of his/her two first level downlines has increased his/her group business volume from $100 to $300, his/her compensation decreases from $9 to $7 ($500xc3x975%)xe2x88x92(S300xc3x975%)xe2x88x92($100xc3x973%). In short, Stair-Step Differential function cannot guarantee that a gain in business volume will compensate for a loss in differential margin.
Another serious problem of Stair-Step functions is that, ultimately, every participant""s first level downline participants will reach the highest level of the table as their groups develop. Doing so, participants are condemned to make no differential of margin on their group""s business volume exception made of their personal purchases. With a view to solve this major inadequacy, SSBA plans complete their method with so-called xe2x80x9cBreak Awaysxe2x80x9d that allow participants to break away from the table after they reach the top margin. At that time, participants are paid a predetermined margin on a predetermined number of levels in a fashion similar to the one described for Non-Differential plans. This additional compensation plan is also referred to as xe2x80x9cbonus planxe2x80x9d, xe2x80x9coverride bonus planxe2x80x9d, xe2x80x9cperformance bonus planxe2x80x9d, etc.
As briefly shown in the above paragraphs, both Non-Differential and Stair-Step Differential methods are ineffective in consistently and naturally remunerating participants who make more individual efforts to increase their group""s business volume. This leads to motivation problems and explains why MLM companies have linked the payment of compensations to collective and individual performance conditions. Such conditions are meant to force participants to perform so that the system can be economically viable. In short, conditions set a minimum level of purchase plus a series of downlines performance levels to which pre-determined margins are allocated for a pre-determined number of levels. Generally, a specific level of performance corresponds to a specific title in a hierarchy. There are as many hierarchic titles as there are levels of performance. Titles refer to precious stones, business positions, army positions, etc. Generally, the acquisition of an upper title (which provides the same.margin to more levels or a higher margin to the same levels) is conditional upon one having developed (among one""s downline) so many participants who carry the titles immediately below. Conditional systems work in a Russian puppet fashion whereby a higher level of conditions includes the lower level of conditions that includes the lower level of conditions and so on. Such systems quickly become mind boggling and impossible to understand for the layperson.
In addition to adding an enormous amount of complexity, conditions introduce their own inefficiencies. First, they exclude the compensation of the very real efforts of people who did not achieve minimal thresholds of performance. They also tend to de-motivate those who could do more than a particular level of conditions without reaching the next level. Finally, conditions bring the possibility that people try to artificially fulfil them by registering dummy participants and having them purchase unwanted quantities of products with a view to fulfil short term requirements.
In conclusion, all of the compensation plans that have been developed by MLM companies to date fail to address the effectiveness challenge of MLM. Both Non-Differential and Stair-Step/Break-Away plans cannot guarantee that, over time, a participant will consistently make more money if and when his/her downlines generate more sales. Such ineffectiveness has justified the introduction of performance conditions. Below, we argue that those conditions have very negative consequences for participants and therefore, for the reputation of MLM as a marketing approach.
As indicated above, the introduction of performance conditions makes existing MLM compensation plans extremely complex for the layperson to understand. In fact, most participants in today""s MLM industry do not fully understand and are, in turn, incapable to explain their compensation plans to others. Yet the capacity to explain compensation is key to interesting others to participate in MLM. Common sense suggests that one will be motivated to participate when one understands how one makes money.
The tremendous complexity of existing MLM compensation plans led the industry to create expensive and time-consuming training and motivation materials. In order to participate in an MLM opportunity, potential participants must generally purchase a business kit that includes information about the company, its leaders, the offer, the MLM concept, sales techniques and the compensation plan. No matter how voluminous they might be, business kits are usually insufficient to properly train people and therefore, they do not dispense participants to attend regular training and motivation sessions/seminars. It is therefore surprising to see that during such seminars, the emphasis is not put on explaining the intricacies of the compensation plan but rather on showing that xe2x80x9cordinary folksxe2x80x9d have made and continue to make money with the system. Business kits are usually sold for between $10 and $400 and new participants are encouraged to attend regular, often weekly seminars where they can bring their potential recruits.
In today""s MLM industry, participants are required to spend significant amount of money, time and efforts in order to participate. The tricky part is that such investment must be made prior to being in a position to judge the potential return of participation and it constitutes no less than a serious entry barrier for the layperson. Indeed, not everyone is willing to spend hundreds of dollars and tens of hours in order to have the opportunity to be remunerated for one""s word-of-mouth effect . . . Especially if the compensation plan is too complex to be explained and if the compensation itself is tied up to obligations to buy and perform. In fact, the majority of active participants in such systems are small entrepreneurs and this is why the MLM industry has traditionally been limited to this very small segment of the population.
Beyond the market limitation for the operator, participant""s investment in money, time and effort have further and graver consequences. In fact, the required investment constitutes negative equity for participants until they have been remunerated up to the required level. In today""s MLM industry, approximately 8 participants out of 10 abandon within one year of participation and since they have wasted time, money and efforts, these people actively propagate a negative image of MLM. Those who continue participating might try to cut their losses by adopting a sectarian attitude and by putting unnecessary pressure on their peers. Such practices fully justify the bad reputation of a legitimate and otherwise well-intentioned industry. Such practices could be avoided and attrition rates could be reduced very drastically if existing compensation plans were effective in meeting MLM""s challenge to divide up a fixed margin among a growing number of participants while motivating them to introduce more people over time.
The Differential Continuous Compensation Plan or DCCP data processing system of the invention is effective in meeting MLM""s challenge, i.e. it naturally motivates its participants to perform word-of-mouth. Doing so, unlike existing MLM plans, it does not need to add layers of pay out conditions in order to ensure minimal individual and collective performance. The simplicity brought by the application of DCCP renders MLM simple enough for the layperson to understand and to communicate to others. Indeed, the approach and its methods can be explained on a single leaflet that makes participants fully autonomous. Consequently, unlike existing MLM plans, participants to DCCP do not have to spend money, time and effort in training and motivation. Since participants have nothing to lose and everything to gain in participating, the system is not limited to a small segment of entrepreneurs (people who have money and time to invest in a small business venture). Since DCCP is offering great potential gains (to be paid forever) in exchange of a small effort (no monetary investment, little time investment to be made once) it can truly be geared towards the operator""s entire population of potential customers. Since every potential customer is concerned, DCCP becomes an additional product/service feature, a significant source of competitive advantage. For the first time ever, the DCCP data processing system provides businesses with the means to effectively remunerate those ordinary people who bring them business through their precious word-of-mouth. They can now do it without having to take part into a traditional MLM industry that has developed a specific and very real expertise in training and motivating large groups of small entrepreneurs. They can do it without being associated with an industry for which the vast majority of participants drop out and possibly loose significant investment in money and time.
More specifically, the DCCP data processing system subject of this invention has the following advantages:
a) it guarantees that, if a participant has introduced more than one person who developed sub-groups of customers, an increment in a particular sub-group""s business volume will generate an increment in his/her net compensation. In other words, it effectively redistributes the available margin by always motivating participants to introduce more people to the offer over time;
b) each participant is remunerated for the marginal contribution that s/he makes to the business volume of his/her group (fair and transparent rule);
c) since the DCCP data. processing system is effective, there is no need for imposing performance conditions in order to pay compensation of participants;
d) since the DCCP data processing system does not impose performance conditions, it does not provide short term incentive to purchase unwanted products or to introduce dummy participants;
e) since the DCCP data processing system is effective, it always uses the same 3-steps calculation method (Differential method with a Continuous mathematical function) for all participants regardless of their position in the generations tree, the time they have been involved, their group business volume, etc.;
f) since the DCCP data processing system always uses the same calculation method, it is understandable for the layperson and explainable on a single leaflet;
g) since it can effectively be explained on a leaflet, it does not require additional training or motivation sessions or seminars;
h) since it does not require any additional training or motivation, it can be offered for free (no entry barriers) and the time and effort required from participants are very significantly reduced;
i) since the required investment in time and effort is small compared to the potential gains, participants to DCCP do not have to be small entrepreneurs (people who have money and time to spend on a small business venture); they can simply be consumers who perform a task similar in intensity to natural word-of-mouth;
j) since there is no need to have a specific expertise in training and motivating large groups of entrepreneurs, DCCP allows any company that wants to communicate and/or distribute an offer to final consumers to adopt MLM as a marketing approach. It can also be seen as a new kind of incentive program to effectively acquire and keep new business;
k) for those companies who never used MLM as a marketing approach, DCCP allows them to reduce their communication budgets by communicating more effectively (personal communications by ever-growing number of channels) and by making all participating customers loyal (new economic rapport with them);
l) for those companies who never used MLM as a marketing approach, DCCP allows them to reduce the financial risk of communicating by spending marketing budgets only after the acquisition of business;
m) for those companies who currently use MLM as a marketing approach, DCCP allows them to significantly broaden their target market (no entry barriers, no entrepreneurial requirements). It also offers tremendous benefits to their current participants who may find it difficult to find other participants with an entrepreneurial profile;
n) for those companies who currently use MLM as a marketing approach, DCCP allows them to significantly reduce their operations costs (no training or motivation infrastructure necessary);
o) for those companies who currently use MLM as a marketing approach, DCCP allows them to significantly reduce attrition rates and improve good conduct (less social pressure and sectarian attitude since there is nothing to lose and everything to gain for participants);
This invention provides a data processing system for monitoring and recording the information flow and data, and making all calculations necessary for maintaining a Differential Continuous Compensation Plan (DCCP) for participants to a Multi-Level Marketing (MLM) or Network Marketing approach.
To participate, i.e. to be compensated periodically for the purchases of a group of people, every participant must register and provide the operator with the name or ID number of another participant who personally introduced him/her to the offer. For each participant, the DCCP data processing system allows the calculation of periodic (usually monthly) compensation based on the total purchases of a group of other participants. A participant""s group is made of every participants that he introduced to the offer directly and indirectly (i.e. through everyone, at infinitum, whose word-of-mouth can be traced back to him). Firstly, the DCCP data processing system adds up the monthly transactions of a participant""s group to determine his/her business volume. Such business volume is then multiplied by a margin that continually increases (tends to reach a maximum set in advance) along with the business volume to determine a gross compensation. The net compensation is equal to the participant""s gross compensation minus the gross compensation of the participants that s/he has personally introduced.
In order to calculate participants"" compensation and unlike any other MLM compensation plans, the DCCP data processing system always uses the same Differential method for each and every participant, no matter how long they have been involved with the MLM program or what their level of performance is. Contrary to other methods of calculation (Semi Differential and Non-Differential), the Differential method has the undeniable advantage of isolating one""s marginal contribution in a diffused and collective process such as word-of-mouth. In the context of limited financial resources, such method has the major advantage of isolating one""s marginal contribution in a collective and diffused effort such as word-of-mouth. All other things being equal, Non-Differential MLM compensation plans (Unilevel, Binaries, Matrix) tend to underpay participants who make big individual efforts and they tend to overpay those who make small efforts. Since they naturally encourage individual apathy (participants have an economic interest in waiting for the others to introduce more participants), they generally constrain participants to meet minimum levels of performance in order to be compensated.
The single use of a Differential method is absolutely original and it is made possible by the integration in the DCCP data processing system of a Continuous mathematical function that associates bigger business volumes with bigger margins up to a maximum margin set by the operator (f(margin, volume) is asymptotic). In order to be appropriate for an MLM compensation plan, such Continuous function must fulfil two conditions (refer to FIG. 3):
∀V greater than 0∀X greater than 0A+E greater than Dxe2x80x83xe2x80x831.
∀V greater than 0∀X greater than 0∀W greater than 0B+C greater than Dxe2x88x92Axe2x80x83xe2x80x832.
Condition 1 guarantees that the Continuous function does not give more margin than what is made available by the operator (fixed margin). Condition 2 guarantees that, if a participant has introduced more than one person who developed sub-groups of customers, an increment in a particular sub-group""s business volume will generate an increment in his/her net compensation (motivation). Note that when a participant has reached the asymptotic part of the function (at that point, s/he has very high volumes calling for very high margins), the additional compensation generated by the function on a specific volume increment may not always translate in significant monetary value but it will never be negative. In other words, Condition 2 ensures that the inevitable loss in margin differential (the margin applied to the volume of sub-groups necessarily grows faster than the participant""s margin when the latter has reached the asymptotic part of the function) will be fully compensated by the gain in volume differential. Such delicate and complex balance concretely means that for a given group, a participant""s net compensation can never decrease over time. Note that such decrease is inevitable when F(margin, volume) is not continuous as is the case with Stair-Step functions commonly used in Stair-Step/Break Away plans (70% of MLM plans in existence). It explains why SSBA plans also have a Non-Differential component to them. Such component is meant to provide additional motivation to those who have reached the last step of the Stair-Step function but, as we have seen before, Non-Differential methods have their own flaws in addition to adding tremendous amounts of complexity to the plans.
In short, the DCCP data processing system brings two new dimensions to the state-of-the-art in MLM. It defines a family of Continuous mathematical functions that constantly and continually motivate participants to introduce more people to the offer. It always uses the same three-step Differential method which, in conjunction to the use of such Continuous function, determines a net compensation that reflects the marginal contribution of participants. Doing so, it effectively meets MLM""s challenge to redistribute a fixed margin among a growing number of people while always motivating them, individually and collectively, in introducing more people to the offer over time.
There is therefore provided a data processing system for managing a Differential Continuous Compensation Plan for a plurality of participants to an MLM or network marketing approach which comprises:
a) computer processor means for processing data;
b) storage means for storing data on a storage medium;
c) means for initializing the storage medium;
d) first means for processing data regarding the registration of each participant and the generation of a specific ID number for each such participant;
e) second means for processing data to ensure that any new participant is introduced by a previously registered participant;
f) third means for processing data regarding the individual purchases of each participant;
g) fourth means for processing data regarding the total purchases of the entire group of each participant;
h) fifth means for processing data to determine the margin applicable to the said total purchases and other predetermined criteria;
i) sixth means for processing data to determine the gross compensation payable to each participant;
j) seventh means for processing data regarding the net compensation of each participant.
There is further provided a data processing system as described above further comprising:
a) first means for inputting and storing pricing data on the storage medium;
b) second means for inputting and storing data regarding purchase volumes in respect of each participant on said storage medium;
c) means for storing the identity of each said participant and his/her relationship with each previous level participant and each subsequent level participant on said storage medium.
d) eighth means for processing data using a differential method of calculation which comprises the use of a continuous function to determine the margin applicable to specific business volume.
In a preferred embodiment, said function must respect the following two conditions:
Condition 1: Resource Limitation
∀V greater than 0∀X greater than 0A+E greater than D
Condition 2: Permanent Motivation
∀V greater than 0∀X greater than 0∀W greater than 0B+C greater than Dxe2x88x92A
xe2x80x83Where
V=group business volume of a given participant prior to adding X;
X=increase in group business volume of said given participant.
W=group business volume of said participant prior to adding X and exclusive of V. In other words, W is the business volume of the other sub-groups of P plus said participants own purchases.
M=the maximal margin that an operator wished to redistribute to pay for the effect of all the participants"" word-of-mouth.
A=X(M(V+W+X)xe2x88x92M(V+X)) or the gain realized by the said participant on the volume increment X.
B=(M(V+W+X)xe2x88x92M(V+W)) or the gain realized by said participant due to margin increment broug,ht by X on W.
C=V(M(V+W+X)xe2x88x92M(V+W)) or the gain realised by P due to margin increment brought by X on V.
D=V(M(V+X)xe2x88x92M(V)) or the gain realised by Q P due to margin increment brought by X on V. It is also a loss for P since the gains of Q are taken off P""s compensation.
E=X(Mxe2x88x92M(V+W+X)) or the margin that is not being redistributed by the function.
F=X M(V+X) gain realised by Q on the volume increment X.
G=G=X (Mxe2x88x92M(V+X))=E+A